In India, Foreign Exchange or Forex trading is not allowed. If someone is found trading Forex instruments on the forex market by the Reserve Bank of India’s representatives, he/she is immediately charged with violation of the law. Hence it is legally a crime to involve in Forex trading and the charges of the crime are imprisonment in a jail in this country. The offense is considered immense, the prediction of intensity can be deduced from the fact that it has been labeled to be non-bailable.
However, it is legal to trade forex with Indian Exchanges like NSE, BSE, MCX-SX where they currently offer 4 pairs(USDINR, JPYINR, GBPINR, EURINR) in Derivatives (Futures and Options Segment). So if you are trading with Indian Brokers who have a membership with the above mentioned Indian Exchanges it is perfectly legal.
And Also it is perfectly legal for Indian Retail traders to invest in overseas equity markets. But margin trading in overseas is supposed to be illegal as per RBI regulation guidelines.
Evidence of the Issue of the illegality of Forex Trading
This is a confirmed finding based on a news report published in Indian Express, in April 2011. As per the report, the author narrated that the illegal nature of forex trading has been confirmed by five private sector and public sector banks.
Forex Trading and Corporations
The reports issued by the banks on this evidences also said that only corporations are allowed to trade but the conditionality for the corporations is to use only free dollars from their reserves. Free dollar usage means that they are not allowed to convert the Indian currency to dollars and then use those converted dollars for trading. Moreover, they are conditioned to stick to a leverage of fewer than ten times.
Forex Trading and Individual Traders: Reports of RBI
Individuals are strictly forbidden from electronic and internet-based foreign trading. The reason being it brings high returns to them but at high charges-the imprisonment charges. The individual traders at India have also been warned by the RBI against the online trading portals which offer these alluring outcomes of high gains but do not reveal to the traders that they are trapping themselves in an illegal activity considered by their state.
RBI also published a circular that reported certain agents who contacted the traders and urged them to invest in forex trading to earn huge profits. In this retrospective, many of the individuals became trapped in this illegal dealing. Moreover, most of the trading done through these internet portals had very huge leverage.
RBI revelations of additional findings and action against fraudulent agents
An additional finding revealed by the RBI was that the public was asked to pay these marginal payments for the trading transactions through their bank account deposits or debit cards. And then the accounts to which the money was being paid were of the same agent but they were opened in many different banks. Therefore the RBI issued special instruction to the commercial banks of the country to be very careful in sorting out such accounts.
RBi clarified that if any such person is caught, then strict action would be taken against him/her under the FEMA, 1999, contraventions. In addition, he/she would also be considered liable for violations of the KYC policy and money laundering standards. And all the transactions which have been declared non-permissible under FEMA are also not allowed. These transactions also include any transactions related to foreign currency, remittances marginal trading or exchanges.
Disclaimer: If you are doing forex trading in India then consult with your Fx Broker on this issue.